Why rich families love South Dakota

By Matthew Heimer

South Dakota is one of the nation’s sleepiest states, with a population of about 850,000 and a whole lot of empty space. But lately, its trust-company industry has been booming: The amount of money those companies administer has tripled in the past four years, to $121 billion. The reason? As Zachary R. Mider reported recently in Bloomberg BusinessWeek, the state has created a particularly welcoming environment for “dynasty trusts”—inheritance-planning vehicles that allow wealthy families to avoid paying estate taxes as they pass millions of dollars to their heirs.

Seabear70/Wikipedia

Sioux Falls, estate-planning boomtown.

South Dakota owes its status as the “Little Tax Haven on the Prairie” (as Mider calls it) to the state’s unusually millionaire-friendly trust-and-estate laws. In the 1990s, most states limited the duration of family trusts to the lifetime of a living heir, plus 21 years; South Dakota, in contrast, had no limits at all. That made it possible, in theory, for a wealthy benefactor to create a trust that could benefit not only her kids, but her great-great-great-great-grandkids.

Since then, more states have removed their duration limits, but the Mount Rushmore State has stayed ahead of the competition. South Dakota laws go the extra mile to shield trust assets from creditors and spouses, and let families control their own trust investments, rather than hiring trustees. What’s more, the state levies no income tax on investments.

Trusts in the state became particularly popular toward the end of 2012, when wealthier families feared that Congress might make more of their assets subject to estate tax (a fear that wasn’t realized). According to regulatory filings, wealthy folks who have taken advantage of prairie generosity in recent years include the Pritzker family, who moved $360 million worth of Hyatt Hotels Corp.
/quotes/zigman/574156/delayed/quotes/nls/hH stock to the state in 2010; and the two top executives at Monster Beverage Corp.
/quotes/zigman/8035590/delayed/quotes/nls/mnstMNST, who did the same with $478 million of their stock last year.

To qualify as South Dakotan, the trusts need to maintain office space in the state. That creates oddities like the one Mider describes at the beginning of the story: A former S.S. Kresge dime store in Sioux Falls, now converted into a corporate space full of trust-company “headquarters” that are mostly empty, most of the time.

(Much admiration, by the way, is due to Mider, who has done some great reporting in recent weeks about the acrobatic estate-planning stunts of the very wealthy, including this article.)

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Encore looks at the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities, needs and priorities of people saving for and living in retirement. Our lead blogger is editor Matthew Heimer, and frequent contributors include editor Amy Hoak, writer Catey Hill, and MarketWatch columnists Elizabeth O’Brien, Robert Powell and Andrea Coombes. Encore also features regular commentary from The Wall Street Journal retirement columnists Glenn Ruffenach and Anne Tergesen and the Director of the Center for Retirement Research at Boston College, Alicia H. Munnell.